Socially Responsible Investing

This is a guest post from Steve at Money Infant where he writes about saving and investing, beating debt, frugal living and the misconceptions and perceptions we all have concerning money.

I recently wrote about sin taxes, those taxes imposed upon goods or services that are deemed to be morally or socially unacceptable to society. The idea is that by increasing the price of the items through taxation people are discouraged from buying them and thus society is served. Another corolary is that the tax dollars generated can go to more worthy causes, thus somehow minimizing the impact of the socially unacceptable goods.

While sin taxes can help to some extent, we really have little to no control over their implementation and enforcement. Governments are left to decide which goods deserve the sin tax status and we may or may not agree with that decision. There are other ways to encourage sound socially acceptable businesses though and that is through the investments we make. Investing in a business (or not) is a way everyone can participate in a free market economy. It also serves as somewhat of a vote of confidence in the soundness of that business and it’s strategies.

Socially Responsible Investing

As individuals we all have limited resources and need to make decisions on how we will use those resources. Once you come to the point where you have an excess of resources (or as we like to say money), you have a responsibility to use that excess money in a way that benefits not only yourself, but society as a whole. While you might profit more by investing in tobacco, alcohol or mining companies those investments certainly don’t benefit society. By avoiding those types of industries you set a moral standard and if you have some level of authority in your community your example could have far reaching effects.

Socially responsible industries are those that benefit humanity as a whole and while they may be there to create a profit for the company and its shareholders they do not do so at the expense of others. They are not involved in polluting the environment, exploiting their workers or creating health problems for their customers. They avoid such questionable practices as animal testing and addictive products.

Where to Find Socially Responsible Companies

Socially responsible companies can be found in many industries, although those related to sustainability and conservation seem to be the most popular. Conversely some companies that you might think are socially acceptable appear tarnished upon closer inspection. For example, the company Kaiser Aluminum is involved in recycling, but they don’t actively promote this to investors. Even worse, the notorious forest-clearcutter MAXXAM owns 2/3 of Kaiser. Sometimes close scrutiny is necessary before investing.

One way to sidestep this scrutiny to some extent is to invest in one of the mutual funds that are dedicated to social investing. Even this can be fraught with peril though as the guidelines of what the mutual fund can invest in can vary wildly. So even if you decide to go the somewhat easier route of letting a mutual fund do the research you want to be cognizant of what they use as criteria for choosing their investment portfolio. One good place to start your research is with Social Funds; a website dedicated to socially responsible investing.

Another option is investing through socially responsible Exchange Traded Funds. The number of these ETF’s has been growing as investors become more aware of the benefits of investing more responsibily. Several socially responsible ETF’s are available through iShares and also through Powershares. Investing in ETF’s can be an easy way to “clean up” your investment portfolio.

Once we have the excess capital to invest in other business and companies we do so in the hopes that our investments will grow in value. However, if you are investing in companies who harm the environment, other humans and even animals you are helping to promote evil in the world. Do you really want to make money on the backs of the suffering of others? By taking a socially responsible approach to investing you can help your fellow humans while also improving your net worth, which in turn allows you to invest and donate more. It can truly be a virtuous cycle and one that benefits all involved.

retirebyforty> I generally do not pay much attention to the socially responsibility side of a company I invest in. I avoid companies that I don’t agree with such as the tobacco company, but other than that I don’t have time to go digging through their dirty laundry. Thanks for sharing your thought about the socially responsible ETFs. I will have to check them out.

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This is one of the reasons why I really like real estate investing. Buying a run-down house and fixing it up is good for the community, good for the family you rent it to, and good for you too! It’s a win all the way around.

Very interesting topic. It’s a tough decision because usually the less socially responsible a company is, the more money they are making. Look at a company like Apple that was recently under criticism for their poor factory conditions that was leading to high suicide rates. So to invest socially responsibly you may have to sacrifice some profit. I like Dollar D’s point about investing in real estate recycling. Things like that could still be very profitable. At the end of the day you’ll just feel better about investing in things like that.

I think some people are willing to trade a few percentage points of gain to be able to live well with themselves knowing they aren’t contributing to any business or venture that goes against their moral grain.

I really liked Dollar D’s point as well. He’ll make a real estate investor out of me yet!

I would expect a fund that invests in tobacco, gambling, defense/weapons, and alcohol industries to have a better return. At the very least I would expect a higher yield since these industries are typically good dividend plays.

Sadly it is alot of work to really did through such investments and figure out which potential companies are truly responsible investments. Though, I would have to argue that training socially responsible investors should be an important part of the education system. With the investor class being so influential in America it would be best to really educate those who have power how to best use it.

I don’t think our education system will be teaching about socially responsible investing any time soon considering that they teach almost nothing about the basics of personal finance now, let alone investments.

The main problems with socially responsible investing are 1) you have no control over what the mutual fund or ETF invests in. Yes the have guidelines but your views Ja be more conservative than the funds objective. 2) You don’t know for certain how responsible a company is. They may say it, but you really have no way of knowing what happens behind the scenes.

The lack of control is true about any type of mutual fund or ETF. And really digging into a companies activities is often way beyond the scope of most individual investors. If you’ve done your due diligence on an SRI mutual fund you just have to assume that they will continue their past investing choices into the future. The only way to have a truly socially responsible portfolio that matches your own beliefs is to buy the individual company stocks after doing your own exhaustive research.

Great post. I am a huge fan of sustainable investing but I find it a challenge. Knowing where to draw those lines and how best to increase your long term gain can be really hard to figure out. I always keep working at it though.

I have a socially responsible fund available through my workplace 401k. Which really tells you something since I have about 8 other choices. The returns are always a couple hundred basis points below a market index, so I don’t tend to allocate anything to them. It is certainly an interesting idea, but I tend to follow the idea that I’ll get as much cash and return as I can for the risk, and then decide myself how best to benefit the world.

That is a valid point and one that I have seen repeated often. It’s a “means justifying the ends” approach that not everyone is comfortable with. At the end of the day though the only person who needs to be comfortable with your investments is YOU.

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